Three Basic Technical Analysis Measures I Like …

Last week, I talked about a way to invest in markets without the need for perfect timing.

But with all the sharp moves we’ve been witnessing, what if you want to try and time things in pursuit of more aggressive gains?

How can you try and decipher which particular stocks are about to rise … or when it’s time to consider taking profits?

Well, I base most of the decisions I make in my Income Superstars newsletter on fundamental measures — earnings reports, dividend histories, and other data points.

But to help augment that research, especially when it comes to determining buy and sell points, I DO study charts and use some basic technical analysis.

Let’s run down three of the simplest ones today …

Technical Analysis Technique #1: Trendlines

Take a look at the following chart of one of my current recommendations Kinder Morgan Partners … up a staggering 91.5 percent including dividends since my original “buy” order back on 10/29/2007 …

See how from the beginning of 2010 through now it pulled back along that simple red trendline I drew?

Now, the pullback in August below that line would certainly be a bit of a cause for concern … and that’s what trendlines can give us … a broad picture of how a given stock is performing relative to past action.

However, once I examined the fundamentals of the company — and considered the broad market’s action over the same time frame — I figured the retracement was okay and would ultimately mean a new surge to the upside once the stock got back above the trendline.

That’s what has happened since then, with Kinder Morgan’s recent news that it was attempting to acquire El Paso serving as a catalyst.

Of course, if you’re looking for a more sophisticated version of the trendline you can also use …

Technical Analysis Technique #2: The Moving Average

Moving averages take trendlines to the next level because rather than being constructed somewhat arbitrarily (i.e. “pick a couple points that look important to you”), they are computed automatically based on a preset series of data.

Specifically, a moving average is a line based on the arithmetic average of the prices it’s drawn against.

What’s the benefit? This way smoothes out all the little movements and creates a line that you can compare them to. Common moving average periods include 200-day, 90-day, and 60-day periods.

I like moving averages as another way to gauge general uptrends and downtrends, and to spot major market reversal points.

Here’s a chart of the S&P 500 with a 60-day moving average thrown in for good measure …

As you can see, the market’s recent surge took it above the moving average, which suggests more upside ahead simply based on this one technical indicator. Conversely, a move substantially below 1183 would be seen as the start of a more serious downward leg.

Of course, perhaps the most useful (and intuitive) way to look at entry and exit points is through …

Technical Analysis Technique #3: Support and Resistance Levels

Investors have a tendency to get hung up on certain numbers … quite often round ones. You know, like Dow 10,000.

I’m not a psychologist, so I’m not going to hypothesize on why it happens. But from many years of following the markets, I can tell you that it does happen with alarming regularity.

This is precisely why I pay close attention to clear levels of support and resistance whenever I look at any investment’s chart.

For example, take a look at this chart of Vanguard’s Intermediate-Term High-Grade Corporate bond fund and you’ll see just how important the 10 level seems to be to investors …

Look how many times this fund pivoted around that mark and you’ll see that it seems very important psychologically to investors.

As you can see, it’s currently sitting right around this level as investors try to decide where interest rates and the U.S. economy are headed next.

For me, that’s what’s really interesting about charts in the first place: They reflect the market’s collective thoughts and opinions.

When events are enough to push an investment through a level that previously presented resistance … it means a certain critical mass has been achieved … and momentum quite often takes over from there.

Obviously the opposite is also true. When a level has previously held on countless downdrafts — forming a strong area of support — you better look out below the first time that level is seriously broken!

Now I’ll be the first to say that you never know when an important level is going to hold or not. However, simply being aware of critical breaking points — along with the fundamental reasons moving a market or an individual investment — will help you make more educated (and hopefully more profitable) decisions.

And perhaps the best part about technical analysis tools like moving averages is that they are no longer only available to professional investors with thousands of dollars in trading software. In fact, most online chart providers — including free websites like Yahoo Finance — now allow you to overlay these tools to whatever investment you’re viewing.

If you don’t already use these indicators, I encourage you to play around with them … they can give you another interesting way of viewing your investments … especially given the wild swings we’re seeing nowadays.

Best wishes,

Nilus